Go instanced MMO until technology allows entire worlds for players..
example
lets say the mmo takes place in skyrim, morrowind and cyrodil
in towns everyone is visable
outside of town only your party is visable ( i think guildwars does it this way)
there can be PVP zones, and dungeons, as well as PVE single player, multiplayer and super large battles as well for all i care.
the problem is the perfect TES MMO is definatly undoable, as the perfect TES MMO would be skyrim but 10000 times the size, place the player in a random spot and say "play the game do what you want"
if you would see another player you could kill him and take his stuff like eve online :3
you could pickpocket him like a champ :3
you could ignore him, or help him with killing that dragon troll monster.
go questing or dungeon hunting with him

you could make armor and sell it to others
you could repair armor for yourself and others
you could collect arrows people left behind
you would have to eat food and drink water or beer.
NPCs would react based on what you do or did
crime wouldn't be a simple " pay the fine" it would have to be a big deal.
Arena vs players, and co-op arena vs NPCs
Dungeons for loots
PVP battles PVE battles, such as everyone vs thalmor
the world would be so big you could travel 24/7 for DAYS and still not get to the other side.
the problem is none of it is doable on current technology.